(As per RBI’s First bi-monthly Monetary Policy Statement for 2017-18

announced on 6th April 2017)

Repo Rate 6.25%

Reverse Repo Rate 6.00%

Bank Rate 6.50%

Marginal Standing Facility (MSF) Rate 6.50%

Cash Reserve Ratio (CRR) 4.00%

Statutory Liquidity Ratio (SLR) 20.50%

Highlights:

 Repo Rate @ 6.25% has been has been unchanged since 4 th October 2016
 Reverse Repo Rate has been hiked by 25 basis points. Earlier it was 5.75%
 Marginal Standing Facility (MSF) Rate has been reduced by 25 basis points. Earlier it was
6.75%
 Bank Rate has been reduced by 25 basis points. Earlier it was 6.75%
 Cash Reserve Rate (CRR) @ 4.00% has been unchanged since 9 th February
2013
 Statutory Liquidity Ratio (SLR) was reduced to 20.50% from 1st January 2017
 The next meeting of RBI’s Monetary Policy Committee (MPC) is scheduled on 5th
and 6th June 2017
Key Facts

 RBI Headquarters: Mumbai

 Current RBI Governor: Urjit Patel

Important terms:

 Repo Rate: Repo rateis the rate at which the RBI lends money to commercial
banks in the event of any shortfall of funds. Repo rate is used by RBI to control
inflation. In the event of inflation, RBI increases repo rate as this acts as a
disincentive for commercial banks to borrow from RBI. This ultimately reduces the
money supply in the economy and thus helps in arresting inflation.

 Reverse Repo Rate: Reverse repo rateis the rate at which the RBI borrows
money from commercial banks within the country. It is a monetary policy
instrument which can be used to control the money supply in the country. An
increase in reverse repo rate means that commercial banks will get more
incentives to park their funds with the RBI, thereby decreasing the supply of
money in the market.

 Bank Rate: Bank rate, also referred to as the discount rate, is the rate of interest
which RBI charges on the loans and advances to a commercial bank. Bank rates
influence lending rates of commercial banks. Higher bank rate will translate to
higher lending rates by the banks. In order to curb liquidity, the RBI can resort to
raising the bank rate and vice versa.

 Marginal Standing Facility: Marginal standing facility is a window for banks to

borrow from the Reserve Bank of India in an emergency situation when inter-bank
liquidity dries up completely. Banks borrow from the central bank by pledging
government securities at a rate higher than the repo rate under liquidity
adjustment facility or LAF in short. The MSF rate is pegged 100 basis points or a
 percentage point above the repo rate. Under MSF, banks can borrow funds up to
one percentage of their net demand and time liabilities (NDTL).

 Credit Reserve Ratio: Cash Reserve Ratio (CRR) is a specified minimum fraction
of the total deposits of customers, which commercial banks have to hold as
reserves either in cash or as deposits with the central bank. CRR ensures that
banks do not run out of cash to meet the payment demands of their depositors.
CRR is a crucial monetary policy tool and is used for controlling money supply in
an economy.

 Statutory Liquidity Ratio: Apart from Cash Reserve Ratio (CRR), banks have to
maintain a stipulated proportion of their net demand and time liabilities in the form
of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated
securities issued under market borrowing programme and market stabilisation
schemes (MSS) etc. also form part of the SLR. Banks have to report to the RBI
every alternate Friday their SLR maintenance, and pay penalties for failing to
maintain SLR as mandated.

RBI targets excess liquidity in continuing

focus on inflation
RBI’s monetary policy committee raised the reverse repo rate to 6%, largely to ensure that
banking system liquidity is consistent with the neutral stance adopted in February

RBI reiterated that it would use the many tools at its disposal to ensure that liquidity is
brought close to a neutral level. Photo: Aniruddha Chowdhury/Mint
The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) on Thursday
decided to raise the reverse repo rate, at which it drains excess liquidity from the banking
system, by 25 basis points, reflecting its steadfast pursuit of inflation management.

The unanimous decision by the six-member committee to raise the rate to 6% is largely to
ensure that banking system liquidity is consistent with the neutral monetary policy stance
RBI adopted in February. One basis point is one-hundredth of a percentage point.
RBI reiterated that it would use the many tools at its disposal, such as cash management bills
and market stabilization bonds, to ensure that liquidity is brought close to a neutral (neither
surplus nor deficit) level. It also said another tool, the so-called Standing Deposit Facility,
under which banks can park their funds with RBI without receiving bonds as a collateral, was
being examined by the government.

Average surplus liquidity in the banking system was Rs4.4 trillion in March as the
invalidation of high-value currency notes in November led to a flood of deposits, prompting
economists to express concern that this would fuel inflation in the days ahead.

“When it comes to inflation, the MPC is choosing to be conservative,” said Gaurav Kapur,
chief economist at IndusInd Bank. “It has reiterated 4% inflation in the medium term as a
core objective. Raising the reverse repo rate is a step towards ensuring that the liquidity
management is in line with the neutral stance.”

While the committee noted that risks to inflation are “evenly balanced” currently, it also
listed several threats. The main upside risks come from the uncertainty surrounding the
monsoon, the implementation of the house rent allowance component of the seventh pay
commission award and one-off effects from the goods and services tax. “The general
government deficit, which is high by international comparison, poses yet another risk for the
path of inflation, which is likely to be exacerbated by farm loan waivers,” said the monetary
policy statement.

Wholesale inflation soared to a 39-month high of 6.55% while retail inflation too inched up
to 3.65% in February, signalling that inflation continues to be a concern for the regulator.
Many economists expect no further rate cuts this financial year.

“The policy has highlighted the upside risks to inflation despite the fact that global risks have
subsided. This means the central bank is keeping a close watch on domestic risks. We are
therefore looking at a prolonged pause before any action is taken this year,” said Upasna
Bhardwaj, senior economist at Kotak Mahindra Bank Ltd.

In a separate report , RBI’s staff economists have projected 4.9% consumer price inflation in
the quarter ending March 2018 and 4.6% in the three months ending March 2019, both higher
than its medium-term target.

Two other facts highlight this risk.

One, household inflation expectations continue to rise. The March round of RBI’s survey of
urban households showed an increase of 20-50 basis points in inflation expectations over the
December round, when they had declined.

Two, the central bank has projected gross value added growth of 7.4% for the current
financial year and 8.1% for fiscal 2018-19.

“The output gap (the gap between potential output and what the economy is actually
producing) is gradually closing. Consequently, aggregate demand pressures could build up,
with implications for the inflation trajectory,” the policy statement said.

What does this mean for lending rates?

RBI has kept the repo rate, at which it infuses liquidity into the banking system, unchanged,
while it has reduced the marginal standing facility rate (at which banks borrow from RBI
beyond what is allowed under the repo window) by 25 basis points to 6.5%.
“Banks have reduced lending rates, although further scope for a more complete transmission
of policy impulses remains, including for small savings/administered rates,” the statement
said.

RBI monetary policy guide: Cash tools in

focus as rates unchanged
RBI will keep the repurchase rate at 6.25% on Thursday, according to all 52 economists in a
‘Bloomberg’ survey; 42 of 44 see the cash reserve ratio held at 4% Key to the RBI’s decision
will be whether it believes banks will be able to retain deposits that poured in after Prime Minister
Narendra Modi’s November clampdown on cash. Photo: Aniruddha Chowdhury/Mint

Mumbai: The Reserve Bank of India (RBI) is expected to keep policy interest rates
unchanged for a third straight meeting, shifting focus to the tools it will use to mop up excess
cash in the banking system that threatens to stoke inflation.

The RBI will keep the repurchase rate at 6.25% on Thursday, according to all 52 economists
in a Bloomberg survey; 42 of 44 see the cash reserve ratio held at 4%. However, two see the
CRR raised to 5% and some analysts flag the potential creation of a new deposit window.

If governor Urjit Patel raises the proportion of deposits banks need to maintain as cash, it will
continue a string of surprises that culminated in February with a shift to a neutral stance,
ending a two-year easing cycle. Money market levers offer the RBI more flexibility than
policy rates to control borrowing costs in a world where inflation is accelerating though
investment stays slow.

“Despite the increase in currency in circulation, liquidity at around 3 trillion rupees through
the first-half of the financial year will strengthen the case for near term RBI action,” said
Madhavi Arora, an economist at Kotak Mahindra Bank Ltd in Mumbai.

The monetary authority will announce its decision at 2:30pm in Mumbai followed by a press
conference 15 minutes later. It will also release growth and inflation forecasts for the
financial year started 1 April.

Sticky deposits

Key to the RBI’s decision will be whether it believes banks will be able to retain deposits that
poured in after Prime Minister Narendra Modi’s November clampdown on cash. Excess
funds are limiting the central bank’s ability to intervene in the foreign-exchange market to
rein in the rupee’s rally.

The currency is among Asia’s top performers, advancing 4.7% this year as Modi consolidates
power following important state election wins. While a stronger rupee stands to lower India’s
import bill and contain price pressures, runaway gains could threaten a recent export
recovery.
Liquidity tools

The RBI has been using a slew of instruments such as reverse repo auctions and cash
management bills to absorb excess funds, but these bear interest costs. The CRR however is
interest-free and any increase would be the first since 2010.

To lower effective interest rates and encourage productive lending, policy makers may also
consider capping the amount of funds banks can park with it under the reverse repo window
while creating a new tool called the Standing Deposit Facility. Banks that park cash with the
RBI under the SDF will be paid a lower-than-policy-rate without any accompanying
collateral, which could prompt them to opt for riskier lending instead.

Establishing the SDF would however need parliament to amend the RBI Act, so Patel on
Thursday will probably lay out a road map to introduce the facility, said Indranil Sen Gupta,
chief economist at Bank of America Merrill Lynch.

“Though the RBI has been strategically intervening in both spot and forward markets, unless
it tightens its belt on the sterilization tools, liquidity and FX management could get more
complex,” Kotak’s Arora said.

V-shaped recovery

Liquidity management is essential because policy rates can take as much as three quarters to
transmit through Asia’s third-largest economy. That’s a luxury Patel doesn’t have: private
investment is near a decade low and inflation accelerated in February for the first time in
seven months. Core inflation—the RBI’s choice measure that strips out volatile food and fuel
costs—is seen as uncomfortably high for too long, imperilling the inflation target.

Investors will also be awaiting a reiteration of a sharp rebound forecast for domestic demand
after the cash-ban dip, and more clarity on how the RBI foresees the impact of a planned 1
July roll out of a national sales tax as well as an expected increase in house rent allowances
for state staff.

RBI may go for 25 bps rate cut in August:

BofAML report
The RBI’s monetary policy committee is expected to cut policy rates by 25 bps in August on
weak growth and benign inflation, says a Bank of America Merrill Lynch report

At the 6 April policy review meet, the RBI kept repurchase or repo rate—at which it lends to banks—
unchanged at 6.25% but increased reverse repo rate to 6% from 5.75%. Aniruddha Chowdhury/Mint

New Delhi: The monetary policy committee of the Reserve Bank of India (RBI) is expected to cut
policy rates by 25 basis points (bps) in August on weak growth and benign inflation, says a Bank of
America Merrill Lynch (BofAML) report.
“We estimate that old series GDP growth, at 4.5-5%, well below our estimated 7% potential/trend.
Not surprisingly, core CPI inflation has slipped to 4.2% from 4.8% in October. It is statistically difficult
to work out potential growth in the new GDP series without past data,” BofAML said in a research
note.

Moreover, all related metrics—industrial production, credit growth, earnings—are running well
below their medium—term averages. “We continue to expect the RBI MPC to cut policy rates 25 bps
on 3 August on weak growth, benign inflation and the need to recoup forex reserves by attracting
FPI equity flows by supporting growth,” it said.

At the 6 April policy review meet, the RBI kept repurchase or repo rate—at which it lends to banks—
unchanged at 6.25% but increased reverse repo rate to 6% from 5.75%. RBI said given the upside
risks to inflation and excess liquidity in the system, the repo rate has been retained at 6.25%.
According to the global brokerage firm lending rate cuts are the key indicator for recovery. “As
lending rates come off, they will revive demand, close the output gap, exhaust capacity and spur
investment,” it said. “We expect bank lending rates to come off by 50-75 bps in the April-September,
‘slack’ industrial season, with RBI governor Urjit Patel stressing the need for lower borrowing costs
again,” the report noted.